They are (unfortunately) necessary
Everyone needs a credit card. It’s basically a requirement in today’s society. Trying to avoid credit cards because they’re evil unfortunately just isn’t possible in the world as it stands today. “Why would I want something evil?” You might be asking yourself. The fact of the matter is that the benefits of having a credit card outweigh the risks, as long as the card is used correctly.
On the upside, most credit cards give you some type of reward for every dollar you spend. Some give cashback, others give points that can be redeemed for flights, hotels, or luxury items. These rewards are often so good that a small population of users have turned collecting these rewards into a hobby.
The most popular way to cash in on this trend is to engage in something called credit card churning. The gist of churning is that you open up new credit cards, spend a certain amount of money to receive a bonus in addition to the normal rewards, and then close the credit cards while having a single principle credit card you keep open to maintain your credit score. Obviously the rules are much more involved than this and change from company to company, but that will be a topic for another article Credit cards help build credit
Most importantly, opening a credit card allows you to start building credit, which is extremely important later in life. Your credit score will be what determines your interest rates when you try to buy a car, and whether or not a bank will approve you to buy a house when you apply for a mortgage.
Credit cards let you spend more than you make
All of these things sound great, but credit cards are not as great as banks, companies, and the first half of this article would make them seem. Credit cards invite you to buy whatever you want whenever you want with nothing more than a little piece of plastic. Here’s where the trouble begins.
It can become extremely comfortable to put all your wants and needs on your credit card. This allows you to not think about or take responsibility for your spending until a later date. Herein lies the problem. 37% of Americans carry a credit card balance from month to month. This means 37% of Americans either don’t think about or don’t care that they are living outside their means.
When you carry debt on a credit card, the purpose is to be short term. That’s how banks and companies that offer credit lines get away with charging exorbitant rates, typically 15% or higher annually in order to borrow their money. Paying interest for a single month can sting, but it isn’t the end of the world. Many Americans don’t just use their credit card as a safety line though. When credit card debt becomes chronic, or the norm, the user pays these exorbitant rates month in and month out.
Quickly this becomes a slippery slope and soon the interest payments are so large that the consumer can’t afford to pay them anymore. When this happens the user defaults on their loans in some way shape or form, their credit takes a hit, and they receive a longer-term consolidated debt payment. Something that can be good and helpful is turned into a detriment because of misuse.
Human nature is the real problem
Herein lies the deception. Especially in low-income communities, the credit card is a staple. Used in reckless abandon, consumers buy with their emotions instead of their logic. If you don’t have a credit card, and you don’t have enough money in your account or figurative pocket, then you’re not able to buy that jacket you want at the store. However, if you do have a credit card, then it becomes much easier to buy that same jacket you want and can’t afford, and you don’t have to worry about it until later.
Even if you did plan for the spending of the jacket, if you plan on spending every dollar you earn, it’s very easy to end up in credit card debt. Unexpected things happen. You could lose your job due to some unforeseen circumstance, or your car could break down, or any number of other things. This is why it’s important not only to not spend more than you earn but also to keep a cash cushion.